How OpenTable puts loyalty to the test

A month ago, San Francisco restaurateur Mark Pastore of Incanto wrote an impassioned blog post, Is OpenTable Worth it?, in which he bemoaned the reservation system's fees and encouraged his readers to better support restaurants, many of which are operating on the edge of business viability, by calling them directly for reservations, thereby reserving OpenTable's substantial fees for the restaurants themselves.

It's a complicated relationship that restaurant owners have with OpenTable. There's no question that OpenTable fills seats that would otherwise go empty. And it's ridiculous to pine for the pre-OpenTable era, when finding a reservation meant calling establishment after establishment and hoping for the elusive available table at the time you wanted. Even Pastore, in an e-mail to me, relented:

I certainly don't want guests to go back to booking all reservations by telephone or as you suggest going serially from one website to the next to find a good table match. Yes, both of those scenarios suck.

What does he want, then? He wants OpenTable to not have a monopoly on the reservation business:

How about some good old fashioned American competition to keep pricing honest? And how about someone figuring out a way to monetize this online service on an ad model, like Gmail or any other of countless web services, rather than as something that ultimately siphons hefty fees from the diners. And how about someone figuring out a way to present a more trustworthy and comprehensive directory of all bookable restaurants out there, not just the closed universe (OT.com) of those who are paying thousands for the privilege of being listed?

At the very least, Pastore would like to see a more restaurant-friendly fee structure. Based on some admittedly old available data, he believes that an OpenTable reservation that costs a restaurant about $10 (taking into account monthly and per-booking fees) would completely negate a typical 5 percent profit on a $200 dinner check. OpenTable takes issue with Pastore's math in its own post. Also check out this discussion on Chow.com.

Leaving the table
It was with my conversation with Pastore in mind that I talked to Chuck Templeton of GrubHub, the OpenTable of take-out. Not coincidentally, Templeton was the founder of OpenTable in 1998. He's already made one fortune from restaurants (OpenTable went public in 2009). It appears he's at it again, with a similar, if less audacious and more open plan.

OpenTable is a subscription service. Restaurants pay a fee to get on the network, plus a fee for each booking. The newer Grubhub charges only for orders taken, with no monthly fee. It also lists nonparticipating restaurants (it includes their scanned menus), although it can't enable online ordering for them.

Templeton believes that since his service can make take-out and delivery more profitable, by improving the yield of a kitchen, his company may even contribute to the the rise of no-table restaurants. As he notes, during a tough economy, diners don't eat out as much, but people still buy prepared and cooked food. And for restaurants, a no-table, delivery-only setup means better per-meal margins, by quite a lot.

Even if Grubhub doesn't contribute to the restaurant business fundamentally changing, it's still a good model, and the company is well-funded ($14 million in three rounds, the latest led by Benchmark) and also riding the mobile wave (you can order from your smartphone in the train home; or when you're at a hotel and want to do better than room service).

Securitizing diners?
But the key to success in this business isn't just delivering a convenient service to diners and incremental profits to restaurants. My impression is that Pastore and Templeton both understand that the real business value to a reservation system is the aggregation of individual consumer loyalties (yours and mine) into big, valuable bundles. When you collect spending and behavior data into big buckets, you can resell it, advertise against it, and--if you end up with a bigger clump of it than anyone else--set the price for using your service wherever you want.

Another way of looking at it: for these businesses to win, they have to move customers' loyalties from the restaurants they serve over to their own services. That is what OpenTable has done very effectively, by giving users a single site and log-in to manage their restaurant planning. To add insult to injury (if you are looking at the business from Pastore's perspective), OpenTable has a loyalty points system that rewards diners for using it--and explicitly not using the restaurants' own reservationists--to book tables.

Grubhub offers a similar one-stop convenience pitch to take-out diners, but it doesn't have a loyalty points system yet. Templeton told me the company is looking into launching one.

Templeton also rebuts Pastore's argument that monopolistic reservations or ordering systems steal value from the restaurants they serve by noting that most restaurant operators welcome the additional business and that these big, centralized systems can provide far richer market data to their customers that the restaurants could collect themselves.

Nonetheless, Pastore believes that a nonmonopolistic reservation system would be better for business owners, since it would cost less. He and I agree that it could also be better for diners since it would encourage competing reservations systems. In the travel business one can see the effect of competition in consumer-facing reservation systems: look at Hipmunk, for example, to see a new spin on airline data visualization and booking.

We see innovation in travel sites not because airline data is open or free--live airfare information comes from a few private sources and is expensive to license--but rather because the revenues to be made from travel bookings are so high that the economics of buying the data work in an entrepreneur's favor. Google, by the way, is attempting to get into this game by buying airline data company ITA.

Speaking of Google acquisitions, this aggregation of customer loyalty is also the root of Groupon's model. This service combines collections of consumers into such valuable bundles that businesses are willing to give them giant discounts. But it's an open argument if these bargain-seekers' loyalties to saving money rub off on the businesses that use Groupon.

Unfettered fees
Pastore is worried that if OpenTable continues to round up and lock in restaurants, it may well start to squeeze its clients for increasing fees, as, he says, TicketMaster has done. Aside from being a loud and rare conscientious objector to OpenTable, he hasn't volunteered to spearhead the creation of a cooperative, open reservation system. Such a project would be hard to get off the ground, in part because OpenTable is more than a collector of table availability; it's also the computerized reservation system that many restaurants rely on for all their table management, including phone reservations and tracking walk-in diners. Switching businesses over to a new system would be a tough sales job.

The restaurant business could stand the competition, but disgruntled owners like Pastore are going to have to do more than talk if they want to see an alternative that works for business owners and diners. OpenTable has had 12 years to dig in and it will be extremely difficult to displace.